How Economic Inequality Harms Society

You ask around to see what people think is the greatest threat to our society and you will get a myriad of answers:  terrorists, globalization, democrats/republicans, government in general, McDonalds, global warming, growing government deficit etc.

But I would propose to you that as a developed nation that our greatest threat is economic inequality.  We have gone through our industrial revolution and it’s later stage of worker’s rights/workplace safety… our suffrage movement and our civil rights movement (while there is still gay/transgender rights lack of rights, wage differences are relatively small compared to pre- suffrage/civil rights movements).  In short, we are a developed nation that has significant wealth as well as basic worker and minority protections in place.

Why Economic Inequality Is Harmful

I’m going to pause here and before you start yelling, “Karl Marx Commie!” and “wicked socialist!” and ask you to consider three ways to think about:

1.  Do you believe in the “American Dream”?  If you do then you should know that the United States has one of the *lowest* mobility rates to move up the economic ladder than almost any other OECD nation.  You are more likely to be in the same economic condition as your parents than in any other rich nation.  Thus, the American Dream should really be called the Swedish Dream or the Denmark Dream (ooooo… alliteration… I like it).  BUT WAIT.  They are socialist.  Hmmmm…
2. There are considerable links between ALL quality of life indexes and levels of inequality.  As inequality (usually measured by the Gini coefficient) increases, the quality of life of the society decreases.  Sad cat.
3.  There is one quality of life index that affects everyone… Don’t you like low-levels of crime and a safer society?  Because it has been found that when there is less inequality within a given community crime rates drop.  Do you want children to be underdeveloped from infancy simply because a mother must be driven back to work immediately after pregnancy?  This creates a child who biologically is already at a disadvantage.  Disadvantaged children are more likely to commit crimes (why do you think that there is a huge drop in crime rates 20 years after Roe V. Wade?  See Freakonomics for evidence)

What I am not saying…

I think your first thought is that if you are taking money from the rich in order to make if “fair” you are just going to give it to the poor.  Nope.  Sorry… I’m more of a realist.  I am both an economics major and I taught in an inner-city school for two years.  Just giving people money does not make their quality of life better, but it also doesn’t change their behaviors that can be applied in the job market.  (An anecdote:  I heard more than once from students that it was easier to live on food stamps than to get a good job.  This is the economic reality of the current welfare state we have created… perpetual poverty.)

So what can we do instead with money from the wealthy?  Better question is “What can’t we do!?”  My philosophy rests on the quote, “Give a man a fish and he can eat for a day.  Teach him how to fish and he can eat for every day.”  Here are some examples: Create jobs, increase access to quality education, teach low-income parents about childcare (Harlem Project), increase head start programs, increase student loan amounts for students whose parents have never been to college, fund programs that increase technical skills for people, recreate our low-income housing system (I have HUGE beef with putting a bunch of low-income people all together as it perpetuates the culture of poverty.  I’ve heard the New Zealand-style of public housing is interesting).  I think there are many wonderful avenues that are worth pursuing.

What should we do?

  1. Close tax loopholes – for two reasons (1) it is not fair for a wealthy person to be paying a smaller tax rate than the middle class simply because their wealth is derived from stocks instead of labor… making risky investments is not a cause for reward of lower tax rates (2) Supply-side economics have been shown not to work.  The wealthy get more wealthy and maybe create a few more jobs but generally just pocket their wealth.
  2. Put limits on how much CEO’s and upper-level management can make.  I’m sorry I’m not sorry that I don’t believe anyone’s job deserves $14.5 mil.  Especially when the evidence is at best unclear that CEO pay has a positive correlation to how well a business does (or even has a negative correlation in many cases).  This will be money saved and recapitalized into the company, creating more jobs.
  3. Create reasonable restrictions in the marketplace so that banks and businesses cannot do risky things like those that got us into this recession that has increased inequality (if you need evidence just google “sub-prime mortgages”).  I understand that we need the free hand of the market… but at the same time we can’t turn our head away and let it strangle us.  The markets are like a garden… they have so much potential and a lot of times you can just let them go grow, but it also needs to be tended to… with weeds removed and to make sure that one doesn’t overtake them all.
  4. Create more equal pay structures (adjusted for cost of living, of course) not only between industries/companies… but also within companies.  For instance, there is still a huge disparity between men and women for the same jobs (women earn $.78 to every dollar men earn… this is clearly unequal).

Why the “free market” itself will not create this

I have heard a few arguments.  Chiefly among them is that we should just let the markets decide.  However, the markets does not care how evenly resources are distributed and thus does not internalize the externalities that accompany higher levels of inequality (watch the ted talk if you want to know what those are).  Thus because the market doesn’t account for this the market is going to come to the wrong conclusion.  Why?  Because these are public goods (lower crime, education, health, etc).  This is why the government must fund them… if left to the market it would choose too low of a level.  Furthermore, we can see the current education system isn’t able to get rid of this disparity (in fact, it currently makes it worse as the quality of education differs drastically between communities).

A third argument is that we shouldn’t make wealthy people do charitable good.  We should just encourage them to use their money in their own way to achieve this good.  This logic fails for many reasons, but mainly because that wealthy people’s motivation is not to lower inequality.  Their “good” usually falls into public works projects (like parks), the arts, or other “hobbies.”  While these are definitely noble causes, they do not aim to decrease the threat of inequality of our society.  Furthermore, they usually don’t view things such as welfare programs positively, so they would not be likely to fund other programs that directly help the poor since they are viewed as “handouts.”

Our Future Reality

I’m no Marxist… I don’t believe there will be a class revolution to instill communism.  Partially because we have seen that communism is not an effective marketplace solution and mostly because people are consciously content with capitalism.  The harm comes psychologically subconsciously to those who born into the bottom (and before you judge them… remember how much your parents were able to give you that those at the bottom have not had.  In fact, just because they are born into a certain zipcode predestines them to a lower quality of education).

If we believe that we are a great nation, we need to remember that our greatness is really limited to how well we take care of each other.


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